To keep up with surging loan demand, Bank of Boston Corp. said on Tuesday it plans to raise as much as $350 million of subordinated debt by the end of next week.

Loans and leases at the super-regional bank grew 10.2% in the last two quarters, far above the industry average. The proceeds of the issue are needed to buoy risk-adjusted capital levels as the bank adds assets.

"Loans grew a lot, which is good news, and we need to keep pace in levels of capital," said Brad Warner, a treasury executive at the bank.

Unique Situation

Bank of Boston's situation stands in contrast to those at the vast majority of banks that have tapped the capitai markets since the start of last year.

Banks have generally issued subordinated debt, which counts as Tier 2 capital, to lift capital ratios, finance acquisitions, or refinance higher-cost issues. Rarely, if ever, did they issue debt to boost capital levels in the face of loan growth.

There's been little need to. About 90 of the 152 banks tracked by the investment firm of Keefe Bruyette & Woods Inc. had loan growth in the 12-month period ending Sept. 30, with 62 reporting a decline. The median change in loan holdings was only a 1% rise.

Bank of Boston's loans grew by $1 billion in the second quarter and $1.6 billion in the third quarter, excluding the effect of acquisitions, said John Kahwaty, director of investor relations. Loans and leases totaled $27.9 billion at Sept. 30.

The third quarter increase included $600 million in commercial and industrial loans, comprising loans to middle market companies in New England and other regions. In addition, the bank increased its consumer loans by $450 million and added $500 million in international loans.

Mr. Kahwaty said the bank expects continued growth in its loan portfolios, but not necessarily at the high rates of the last six months.

The timing of the debt issue appears favorable for Bank of Boston, as investor interest in its bonds is growing.

Bank of Boston's subordinated debt has rallied this year in the secondary market. The bank's 8.375% subordinated debt due in 2002 was recently bid to yield 81 basis points over the comparable U.S. Treasury note, compared to 147 basis points over Treasuries at the end of last year, according to CS First Boston.

"The market has continued to show our spreads shrinking, so you might as well get the capital when you need it, as long as the price is right," Mr. Warner said.

Unrelated to Acquisition

Bank of Boston is still deciding on the maturity of its planned issue, said Mr. Warner. He said the bank was considering maturities between 10 years and 15 years. The bank may enter into a swap to make floating rate payments for part or all of the issue, but a decision on this has not been made, he said.

The issue could be in the market as early as this week, said Mr. Warner.

He said the debt issue is unrelated to the pending acquisition of BankWorcester Corp. Bank of Boston was forced by regulators to raise $100 million of subordinated debt and $70 million of preferred stock earlier this year to receive approval to purchase MultiBank Financial Corp.

The bank had a 7.2% Tier 1 capital ratio and an 11.7% total capital ratio at the end of September. A $300 million subordinated debt issue would add roughly 80 basis points to the company's total capital ratio.

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